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April marked the 10-year anniversary of the JOBS (Jumpstart Our Business Startups) Act. The bill, which was signed into law thanks to bipartisan support at the end of President Obama’s first term, has helped small biotechnology companies to go public—bringing more treatments to market for patients and strengthening the bioeconomy.
The JOBS Act of 2012 made it easier for businesses to go public by creating the “emerging growth company” (EGC) designation. This designation applies to companies that make less than $1.07 billion in annual gross revenues and meet certain other thresholds, like market cap. The law lets these companies present a draft prospectus of an initial public offering (IPO) for review by would-be investors ahead of an IPO to “test the waters.” In addition, if an EGC decides to go public, the law provides up to five years of forbearance from certain reporting requirements leading up to, during, and right after an IPO.
How we got to the JOBS Act
The legislation came about in the wake of a notable reduction in initial public offerings as a result of the infamous dot-com bubble burst.
Congress responded to the market tumult with the Sarbanes-Oxley Act of 2002, which went after corporate fraud by increasing regulatory demands on publicly traded companies. Then, as a follow-up on the 2008 recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010. Dodd-Frank aims to protect consumers with increased regulation of banks, which led to institutional investors taking fewer risks, such as backing IPOs.
“A lot of the regulation that happened dissuaded many small companies from going public,” according to Carlo Passeri, Senior Director of Capital Markets at the Biotechnology Innovation Organization (BIO). The JOBS Act was ultimately passed as a way of undoing some of the unintended overcorrection in regulation that came from both the Sarbanes-Oxley and Dodd-Frank legislation.
Why the JOBS Act matters
The JOBS Act makes it much more affordable for EGCs, many of which are biotechnology firms, to go public. On average, complying with Sarbanes-Oxley costs publicly traded companies up to $2 million per year. By allowing EGCs to be exempt from such compliance costs for their first five years as publicly traded companies, they can focus on conducting research. As Passeri noted, “$2 million goes a long way in the lab.”
It often takes biotechnology companies between 10 and 15 years before they start generating product revenue, and until then, all money goes into research and development. The JOBS Act helps to provide such companies with critically-needed funds for research without having to worry in the short-term about compliance costs such as those imposed by Sarbanes-Oxley.
The impact and planned improvement
The numbers don’t lie: 93% of U.S. IPOs were completed by EGCs since 2013 according to a U.S. House Financial Services Committee report.
A shining example of the JOBS Act in action is Moderna, which thanks to the law, leveraged its status as an EGC to facilitate going public. “They started this way, and they didn’t have a pandemic when they first listed. They used that [EGC] exemption to develop the platform that was able to respond to COVID [less than three years after going public],” according to Passeri.
Sen Pat Toomey (R-PA), who serves as the Ranking Member on the U.S. Senate Banking Committee released a draft proposal recently of a “JOBS Act 4.0” which is made up of 29 bills, 24 of which have already been introduced on Capitol Hill but with the midterm elections fast approaching and Sen. Toomey retiring, the fate of this proposal remains unclear.
